Bank failures since the beginning of this year continued to provide evidence of three realities observed consistently in the past:
(1) the reported value of the banks’ assets turned out to be greatly exaggerated upon failure, when these assets had to be assigned a more realistic, dissolution value;
(2) the true market value of the failed banks’ assets was determined to be so questionable that in order to get the acquiring banks to take these assets over, the FDIC was forced to enter into extensive loss-sharing agreements guaranteeing their value; and
(3) the pace at which the FDIC closed insolvent institutions continued to be too slow to reduce the huge backlog of troubled institutions operating throughout the Country and instead, caused that backlog to increase significantly.
All these observed trends lend support to the key message we hear frequently on JSMineset, that there is no alternative to the practice of “Quantitative Easing to infinity” being practiced by the Federal Government. The U.S. banking system is far too fragile to survive any significant reduction of liquidity.
Figures So Far In 2011
So far this year, the FDIC has closed a total of 40 banks. Collectively, these banks had assets represented to be worth $17.1 billion and deposits of $15.1 billion. The FDIC estimates these failures will cost $3.2 billion, about 21% of deposits.
Perspective On Over-Valuations
Based on the FDIC’s loss estimates, the actual value of the 40 failed banks’ assets was not $17.1 billion, as reported, but about $11.9 billion. Collectively, bank management had over-stated asset values by about $5.2 billion, or 43%.
As always, there were specific examples of overvaluations that dwarfed the averages.
Community Central Bank of Mount Clemens, MI (closed 4/29/11) had reported assets of 476.3 million and deposits of 385.4 million. The FDIC estimated its closing cost $183.2 million. Based on that estimate, the bank’s assets were really only worth $202.2 million, and had been over-valued by 136%.
The First National Bank of Davis, Davis, OK (closed 3/11/11) had reported assets of $90.2 million and deposits of $68.3 million. The FDIC estimated its closing cost $26.5 million. Based on that estimate, the bank’s assets were really only worth $41.8 million, and had been over-valued by 116%.
First State Bank of Camargo, OK (closed 1/28/11) had reported assets of $43.5 million and deposits of $40.3 million. The FDIC estimated its closing cost $20.1 million. Based on that estimate, the bank’s assets were really only worth $20.2 million, and had been over-valued by 115%.
San Luis Trust Bank, FSB, San Luis Obispo, CA (closed 2/18/11) had reported assets of $332.6 million and deposits of $272.2 million. The FDIC estimated its closing cost $96.1 million. Based on that estimate, the bank’s assets were really only worth $176.1 million, and had been over-valued by 89%.
Finally, Park Avenue Bank of Valdosta, GA (closed 4/29/11) had reported assets of $953.3 million and deposits of $827.7 million. The FDIC estimated its closing cost $306.1million. Based on that estimate, the bank’s assets were really only worth $521.6 million, and had been over-valued by 83%.
The extent of these overvaluations suggests that throughout the country, banks’ least liquid assets are being valued at amounts that greatly exceed the amount they could realistically be sold for in the open market. Such is the inevitable result of the Financial Accounting Standards Board (“FASB”)’s abandoning fair value accounting standards in April 2009.
Extent of FDIC Loss-Sharing Agreements
Of the 40 bank closings so far this year, the FDIC accomplished 27 by entering into loss-sharing agreements covering a high percentage of the assets taken over by the acquiring banks. To be more precise, in these 27 cases the acquiring banks took over a total of about $12.7 billion of the failed banks’ assets, and the FDIC entered into loss-sharing agreements covering $8.3 billion of those assets – approximately 65%.
This brings to about $199 billion the total value of assets the FDIC has agreed to guarantee under loss-sharing agreements between 2008 and the present. The FDIC has, in effect, placed a floor under the value of $199 billion of failed banks’ assets for a period of ten years from the date of failure.
Growth In Troubled Banks Despite Closings
Over the past 12 months, there has been a very significant reduction in both the pace at which the FDIC has been closing banks and the asset size of those banks being closed. For example, in the four months between January 1, 2010 and April 30, 2010, the FDIC closed 64 banks with reported total assets of $61.84 billion –about $966 million per bank (on average). During the same period this year, the FDIC closed only 39 banks with reported total assets of $16.97 billion –about $435 million per bank (on average).
This slowing in bank closings could be interpreted as evidence of a recovery in the banking sector and the economy as a whole. However, there is a great deal of evidence to suggest it is more likely an exercise in Manipulation of Perspective Economics.
The pace at which the FDIC is resolving bank failures is not reducing the backlog of institutions operating without sufficient capital, but causing it to grown. Based on FDIC reports of enforcement actions, it is clear that each month, many more banks are newly being recognized as undercapitalized than are recovering or being closed.
Further proof of this is found in FDIC announcements regarding its list of Problem Banks, which are banks rated by examiners as having very low capital cushions against risk. As of the first quarter of 2010, there were 775 institutions on the Problem List. By the last quarter of 2010, that number had grown to 884.
It is difficult to say why the asset size of institutions being closed has decreased so dramatically because the FDIC does not release detailed information on the banks it considers troubled. The inviting conclusion is that while the market for failed bank assets remains so poor, the FDIC is trying to get rid of the smaller problems first. As it stands, in each failure of significant size the FDIC has been forced to enter into loss-sharing agreements guaranteeing two-thirds or more of the value of the assets taken over.
In summary, it would be dangerous to assume there has been any significant improvement in the banking sector over the past several years. There remains ample evidence of radical over-valuation of bank assets. Absent some $200 billion in FDIC loss-sharing agreements, there is no question the recognized value of those assets would have plunged even further.
Finally, the number of troubled banks operating in this Country continues to grow significantly. This reduces the prospects for increases in the kind of lending needed to spur economic growth, and guarantees no end to the Federal Government’s programs of Quantitative Easing to Infinity.
CIGA Richard B.